INFORMATION

Friday, May 25, 2012

I'm in the hotel industry and to get an exact food cost every day, I have a point of sale system. From there I have the net cost of purchases, and the net income.

My question is: If I use those parameters (net cost divided by net revenue) is this the true food and beverage cost?

The reason I ask is because of tax, should I calculate the purchase price with tax? The revenue with tax. I think not.

Just want to ask someone else that seems to know allot about F&B cost control.

Thanks,

Pieter

Pieter, I'm going to start with your term "net cost of purchases" since this is the key term. I would include the taxes paid on goods purchased in my cost of goods sold. If we hadn't purchased stock, we would not have been taxed. The tax is directly tied to your purchases. However, very few operations spread taxes paid over all items in an accurate manner. Most operators expense the tax immediately in the cost of goods sold total. Why is this the case?

If taxes were included in inventory calculations (item by item in the cost per unit used to extend the quantity), the tax would be allocated accurately to the cost of goods sold. By leaving tax out of the cost per item, operators are being conservative since they recognize the expense as soon as they book purchases in their accounts payable journal.

We all need to pay sales tax directly to the various governments. This tax is not available to cover other expenses or profit. Therefore, I would omit the tax on revenue and use net revenue in my calculation.

To get an exact food cost every day, you need to monitor goods leaving your inventory stocks. Closely monitoring purchases is an excellent idea but it won't provide you with the correct numerator in the formula. If you purchased a case of canned tomatoes and only used one can on the day of the purchase, your inventory of canned tomatoes would increase by 5 cans. These cans shouldn't be included in the food cost for the date of purchase.

Most operators do not monitor goods requisitioned from inventory. Many hotels do track transfers but it is very rare in restaurants. The daily transfer recap would provide you with the figure needed to do an exact daily food cost.

Tuesday, May 22, 2012

For months, a "Coming Soon" sign was in a store window at a busy strip mall. As time went on, the signs indicated a Peruvian chicken concept was coming to our neighborhood. Northern Virginia is blessed with many top quality rotisserie restaurants but they are located 10 miles or more from our village. As the paper came down off the front window, people were genuinely excited about the new addition.

The restaurant opened on May 11 to a throng of chicken afficianados. There was a line out the door when I drove by to check traffic. I decided to wait a few days to let the team work out the kinks. When I did go inside 3 days later, I just wanted a take-out menu. The manager said they had not yet received the menus from the printer but he gave me a website to visit.

We decided to try the chicken last Thursday evening at approximately 7:30 PM. There was a short line when we arrived and it seemed to be frozen. After I placed my order, I joined the family at the table. Around ten minutes later, a rack of chickens was removed from the oven and prepped. Workers quickly filled the orders and called out numbers. We were last to be served.

I noticed the cashier explaining to people in the order line there would be a delay of one hour. The oven was rapidly restocked by the production person. Every single person in the line left. It was now close to 8:00 PM and this is a military town where many workers wake up quite early. As we ate our meal, I noticed more people going to the cashier and receiving the bad news. Using a modest check average estimate, I watched as over $400 of revenue was lost.

We finished our meal and decided to take care of some shopping in the vicinity. At 8:50 PM, my curiosity drew me back to the restaurant at the time the chickens were ready for service. The perfectly cooked birds were transferred to the warming bin since there were no more patrons.

During my meal, I checked out the production capacity, the storage space, the dining room layout, the space devoted to walkways and I sketched out a optimum gross profit estimate. The number one constraint is the rotisserie oven. They purchased a 20 bird model. This is a family operation and I believe they are all in with respect to their personal funds. The entire space is tight with the dining area claiming 50% of the square footage. The oven is sandwiched between the range and the warming bin. Workers have very little space and frequently run into each other.

Since I wasn't around for the early dinner period, I can only project the oven limitations cost even more lost revenue.

So we have a family trying very hard to serve as many patrons as possible with the assets they were able to assemble with limited funds. This is a classic constrained optimization model. Cost accountants love these type of puzzles. How could they produce the chickens needed for the 7:30 PM shift and avoid cooking the unnecessary birds for the low after 9:00 PM volume?

Someone should have been counting the lost revenue at 8:00 PM. Perhaps a person could be stationed at the door to explain the 100% fresh production policy and to offer a coupon for a future meal. The production team should be trained to stop fully stocking the oven late in the evening since very few guests will return to have dinner at 9:00 PM in this neighborhood.

I would purchase a large digital time piece for the front window. Every time the chickens start their 1 hour journey from their raw marinated state to the fantastic mouth watering perfection, the clock could be reset. Patrons could drive by and check the clock. There are plenty of options for a would be patron. There is a large super market, a big box department store and lots of small shops. Orders could be taken ahead of time and the clock could be set to 2 hours if they completely sell the next round.

Communication is key. Many of the visitors were frustrated with the lack of chicken. At least they could avoid the wasted time parking their car and standing in line only to find they would not be able to purchase a meal for the family.

I intend to continue my observations this summer. In the long run, I believe the space can be reconfigured to create a higher volume take-out only operation.

Thursday, May 10, 2012

Just wanted to know whether paper plates, plastic items, glasses and cups should be included in the food cost calculation. I am working as chef for a chain of restaurants with actual food cost around 26% to 28%. But after including plastic purchases, my cost goes beyond 36 to 37 percent. Is it correct to include this as part of my food cost? What can be done to reduce that cost?

Warm regards and many thanks,

Hiren, Chef, Lebmex Restaurants

Thanks for the question Chef. Accounting for cost of goods sold should definitely include all disposables, linen, dish washing chemicals and other items which vary with sales volume. In your operation, the impact of disposable paper and plastic items is very significant. Quick service operators have been closely tracking these costs for years. As the take out food sales increase steadily, many more operators will see the impact on cost of goods sold increase.

So should we include these costs as part of the food cost formula? No. My reasoning involves the natural tendency to allocate costs to major activities. Most operations separate food sales and beverage sales. It is common to spend considerable time and effort on the cross over items like lemons, limes, olives, cherries, juices, and wine and liquor used in the kitchen. Every company has a policy (either formal or informal) regarding inclusion of coffee and tea sales in either the food or beverage category. I believe any attempt to build disposables cost directly in the food cost figure is a mistake because of the potential for allocation confusion.

There is usually a profit and loss statement section to handle direct operating expenses. Are disposables a part of cost of goods sold or direct operating expenses? I favor the inclusion of these costs in the cost of goods sold section (used in the gross margin calculation). If a restaurant uses paper napkins, I would include the napkins in cost of goods sold as Disposables Cost.

Your second question is at the heart of this issue. "What can be done to reduce that cost?"

Disposable items may be related to a specific menu item (e.g. a sandwich wrapper), or per cover (e.g. napkins and utensils), or per table (e.g. disposable table covers). Take out bags are used to pack multiple items for any number of guests. Should these costs be included in standard recipes? Fortunately, the software available for our industry allows multiple recipes for the same menu item. You can use an all inclusive recipe model to control all your cost of goods sold items including food, beverages and disposables. Wrappers and other menu specific items can be included in individual menu item recipes.

Take out bags can be tagged to the take out count from your POS report. You can make recipes which track the costs to open each day including any napkins on the tables, paper table covers, plastic utensils used on the tables, etc. If you track table turns, these "recipes" can be built to track each turn. Use your vision of the operation to guide you in this process. Once you have a model built, you simply compare standard usage and actual usage. You may find napkins are over used. Proper training can significantly lower napkin usage.

Paper towels, toilet paper and other high volume items can be tracked by patron counts. The goal is to understand the consumption pattern and develop a system to monitor variances. In your company, a 10% drop in disposables usage represents 1% of sales. This is an achievable objective in most organizations.